Mesa Royalty Trust(MTR) - 2025 Q2 - Quarterly Report

Registrant Information Form 10-Q Filing Details Mesa Royalty Trust filed its Quarterly Report on Form 10-Q for the period ended June 30, 2025. The Trust is a non-accelerated filer and a smaller reporting company, with 1,863,590 Units of Beneficial Interest outstanding as of August 14, 2025 - Mesa Royalty Trust filed its Quarterly Report on Form 10-Q for the period ended June 30, 2025[2] - The registrant is a non-accelerated filer and a smaller reporting company[4] | Units of Beneficial Interest Outstanding (as of Aug 14, 2025) | 1,863,590 | | :------------------------------------------------ | :-------- | Disclosures Regarding Forward-Looking Statements Forward-Looking Statements Disclaimer This section outlines the forward-looking statements contained within the Form 10-Q, emphasizing that actual outcomes may differ materially due to various risks and uncertainties, many of which are outside the Trust's control. The Trustee relies on Working Interest Owners for information, and there's no assurance that expectations will be correct or that the Trust will update these statements unless required by law - The Form 10-Q includes forward-looking statements subject to risks and uncertainties, intended to qualify for safe harbor provisions[6] - Actual outcomes and results, largely outside the Trust's control, may differ materially from projections[6] - The Trustee relies on Working Interest Owners for information, and cannot assure that errors or adjustments by them will not affect future royalty income and distributions[7] PART I—FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited financial statements for Mesa Royalty Trust, including statements of distributable income, assets, liabilities, trust corpus, and changes in trust corpus for the periods ended June 30, 2025 and 2024, along with detailed notes explaining the Trust's organization, accounting basis, legal matters, tax implications, excess production costs, and distributable income per unit Statements of Distributable Income Three Months Ended June 30: | Metric | 2025 | 2024 | | :------------------------------------------------- | :------- | :------- | | Royalty income | $220,855 | $305,372 | | Interest income | $20,446 | $24,417 | | General and administrative expense | $(45,484) | $(59,138) | | Income available for distribution prior to cash reserves | $195,817 | $270,651 | | Cash reserves withheld for Trust expenses | $— | $(47,000) | | Distributable income | $195,817 | $223,651 | | Distributable income per unit | $0.1051 | $0.1200 | Six Months Ended June 30: | Metric | 2025 | 2024 | | :------------------------------------------------- | :------- | :------- | | Royalty income | $331,817 | $489,029 | | Other income | $(432) | $(14,664) | | Interest income | $40,607 | $48,645 | | General and administrative expense | $(95,177) | $(105,330) | | Income available for distribution prior to cash reserves | $276,815 | $417,680 | | Cash reserves withheld for Trust expenses | $— | $(72,000) | | Distributable income | $276,815 | $345,680 | | Distributable income per unit | $0.1485 | $0.1855 | - Royalty income decreased by approximately 27.6% for the three months ended June 30, 2025, and by approximately 32.1% for the six months ended June 30, 2025, compared to the respective prior year periods[11] - Distributable income per unit decreased from $0.1200 to $0.1051 for the three months ended June 30, 2025, and from $0.1855 to $0.1485 for the six months ended June 30, 2025[11] Statements of Assets, Liabilities and Trust Corpus | Metric | June 30, 2025 (Unaudited) | December 31, 2024 | | :------------------------------------------ | :------------------------ | :------------------ | | ASSETS | | | | Cash and short-term investments | $2,087,235 | $1,930,126 | | Net overriding royalty interest in oil and gas properties | $42,498,034 | $42,498,034 | | Accumulated amortization | $(41,264,711) | $(41,240,185) | | Total assets | $3,320,558 | $3,187,975 | | LIABILITIES AND TRUST CORPUS | | | | Distributions payable | $176,336 | $58,101 | | Trust corpus | $3,144,222 | $3,129,874 | | Total liabilities and trust corpus | $3,320,558 | $3,187,975 | - Total assets increased by approximately 4.16% from $3,187,975 at December 31, 2024, to $3,320,558 at June 30, 2025[12] - Cash and short-term investments increased by approximately 8.14% from $1,930,126 to $2,087,235[12] Statements of Changes in Trust Corpus Three Months Ended June 30: | Metric | 2025 | 2024 | | :------------------------------------ | :--------- | :--------- | | Trust corpus, beginning of period | $3,139,263 | $3,062,229 | | Distributable income | $195,817 | $223,651 | | Distributions to unitholders | $(176,336) | $(209,742) | | Amortization of net overriding royalty interest | $(14,522) | $(14,806) | | Trust corpus, end of period | $3,144,222 | $3,108,332 | Six Months Ended June 30: | Metric | 2025 | 2024 | | :------------------------------------ | :--------- | :--------- | | Trust corpus, beginning of period | $3,129,874 | $3,040,907 | | Cash reserves withheld for Trust expenses | $— | $72,000 | | Distributable income | $276,815 | $345,680 | | Distributions to unitholders | $(237,942) | $(324,729) | | Amortization of net overriding royalty interest | $(24,525) | $(25,526) | | Trust corpus, end of period | $3,144,222 | $3,108,332 | - Trust corpus increased from $3,129,874 at the beginning of the six-month period to $3,144,222 at June 30, 2025[14] - Distributions to unitholders decreased by approximately 26.88% for the six months ended June 30, 2025, compared to the same period in 2024[14] Note 1—Trust Organization and Provisions - The Trust, a passive entity created on November 1, 1979, owns an overriding royalty interest (Royalties) equal to 11.44% of 90% of Net Proceeds from specified oil and gas properties[18] - The Royalty Properties include the Hugoton field of Kansas, San Juan Basin field of New Mexico, and San Juan Basin field of Colorado[21] - Simcoe, an operator of San Juan Basin — Colorado Properties, reported that the Trust remains in a deficit position as of June 30, 2025, due to prior period adjustments for joint interest billing amounts, resulting in no royalty income from Simcoe for the three months ended June 30, 2025[23] - The Trust's purposes are limited to converting Royalties to cash and distributing it to unitholders, with no control over operations or marketing of production[27][26] - The Trustee's fees for Q2 2025 were $118,750, with $10,462 allocated to offset interest due to the Trust, as the Trustee was unable to secure the required 6.00% annualized return on cash reserves[28] Note 2—Basis of Presentation - The financial statements are prepared on a modified cash basis of accounting, where royalty income is recorded when paid by Working Interest Owners, and general and administrative expenses are recorded when included in the monthly distribution calculation[37] - This modified cash basis differs from GAAP, which would recognize royalty income based on Net Proceeds from production regardless of receipt date and accrue expenses when incurred[39] - The Trust operates as a single operating and reportable segment, deriving income from its net overriding royalty interest[39] Note 3—Legal Proceedings - There are no pending legal proceedings where the Trust is a named party[40] - Working Interest Owners have advised the Trustee that the Trust may be subject to ordinary course litigation related to Royalty Properties, but they do not believe it will have a material adverse effect[40] Note 4—Income Tax Matters - The Trust is classified as a grantor trust for federal income tax purposes, incurring no federal income tax liability itself; unitholders are taxed on their pro rata share of income and expense[41] - Unitholders may be subject to the 3.8% Net Investment Income Tax (NIIT) on investment income derived from units[42] - The Trust is considered a non-mortgage widely held fixed investment trust (WHFIT) for U.S. federal income tax purposes, with middlemen responsible for information reporting to unitholders[43][44] Note 5—Excess Production Costs - Excess production costs occur when costs exceed revenue from a Royalty Property, and these costs are recoverable by Working Interest Owners before royalty income is distributed to the Trust[45] | Property | As of June 30, 2025 | As of December 31, 2024 | | :-------------------------------------- | :------------------ | :---------------------- | | Hugoton Properties | $871,161 | $734,035 | | San Juan Basin – Colorado Properties – Simcoe | $37,810 | $36,622 | | San Juan Basin – Colorado Properties – Red Willow | $24,859 | $23,181 | | San Juan Basin – New Mexico Properties – Hilcorp | $— | $— | | Total | $933,830 | $793,838 | - Total excess production costs increased by approximately 17.64% from $793,838 at December 31, 2024, to $933,830 at June 30, 2025[45] Note 6—Distributable Income Per Unit - Royalty income and distributions are heavily influenced by fluctuating commodity prices for oil and natural gas[46] - The Trustee maintains a Contingent Reserve for future unknown contingent liabilities and expenses, which was $1,910,899 as of June 30, 2025, up from $1,823,165 as of June 30, 2024[47] Distributable Income Available for Distribution Per Unit: | Period | 2025 | 2024 | | :------------------------------------ | :------- | :------- | | Three Months Ended June 30, per unit | $0.0946 | $0.1125 | | Six Months Ended June 30, per unit | $0.1277 | $0.1742 | Item 2. Trustee's Discussion and Analysis of Financial Condition and Results of Operations Overview and Trust Structure Mesa Royalty Trust, established in 1979, is a passive entity owning an overriding royalty interest in oil and gas properties across Hugoton and San Juan Basins. Its sole purpose is to convert royalties to cash and distribute to unitholders, with no operational control or capital expenditure responsibilities. The Trust relies entirely on Working Interest Owners for operational and financial data, and its distributions are highly sensitive to natural gas prices - The Trust owns an overriding royalty interest (Royalties) equal to 11.44% of 90% of Net Proceeds from specified oil and gas properties in the Hugoton and San Juan Basins[50] - The Trust is a passive entity, limited to converting Royalties to cash and distributing it to unitholders, without engaging in business or investment activities, or controlling capital projects[52] - Trust unitholders and the Trustee have no influence or control over the operation or development of the Royalty Properties, relying solely on Working Interest Owners for all operating and financial information[53] - Net Proceeds and quarterly distributions are highly dependent on natural gas prices, which can fluctuate widely due to various external factors[55] Note Regarding Forward-Looking Statements This section reiterates the forward-looking statements disclaimer, emphasizing that projections are based on assumptions and information from Working Interest Owners, but actual results may differ materially due to various risks and uncertainties, including those detailed in the Trust's Annual Report on Form 10-K. The Trust does not commit to updating these statements unless legally required - All statements other than historical facts, including future financial position, business strategy, and commodity pricing, are forward-looking statements[56] - Actual outcomes and results, which are substantially all outside of the Trust's control, may differ materially from those projected[56] - The Trustee relies on Working Interest Owners for information, and cannot assure that errors or adjustments will not affect future royalty income and distributions[58] Summary of Royalty Income, Production and Average Prices This summary provides a detailed breakdown of the Trust's proportionate share of Gross Proceeds, capital costs, operating costs, Net Proceeds, and royalty income, along with average sales prices and net production volumes for natural gas, natural gas liquids, and oil and condensate for the three and six months ended June 30, 2025 and 2024. Royalty income is significantly influenced by commodity prices and is computed after deducting various costs - Royalty income is computed after deducting the Trust's proportionate share of capital costs, operating costs, and interest on any cost carryforward from Gross Proceeds[60] - The Trust's royalty income and distributions are heavily influenced by commodity prices, which can fluctuate widely[61] Three Months Ended June 30, 2025 vs 2024 | Metric | 2025 (Natural Gas) | 2024 (Natural Gas) | 2025 (Natural Gas Liquids) | 2024 (Natural Gas Liquids) | 2025 (Oil and Condensate) | 2024 (Oil and Condensate) | | :------------------------------------ | :----------------- | :----------------- | :------------------------- | :------------------------- | :------------------------ | :------------------------ | | Trust's proportionate share of Gross Proceeds | $663,787 | $590,092 | $216,254 | $311,162 | $21,038 | $10,339 | | Royalty income | $147,101 | $194,319 | $64,792 | $105,398 | $8,962 | $5,655 | | Average sales price | $2.99/Mcf | $2.89/Mcf | $14.81/Bbls | $25.67/Bbls | $63.20/Bbls | $68.43/Bbls | | Net production volumes attributable to Royalty paid | 49,225 Mcf | 67,173 Mcf | 4,376 Bbls | 4,105 Bbls | 142 Bbls | 83 Bbls | Six Months Ended June 30, 2025 vs 2024 | Metric | 2025 (Natural Gas) | 2024 (Natural Gas) | 2025 (Natural Gas Liquids) | 2024 (Natural Gas Liquids) | 2025 (Oil and Condensate) | 2024 (Oil and Condensate) | | :------------------------------------ | :----------------- | :----------------- | :------------------------- | :------------------------- | :------------------------ | :------------------------ | | Trust's proportionate share of Gross Proceeds | $1,160,349 | $1,183,660 | $506,583 | $621,807 | $32,722 | $24,326 | | Royalty income | $202,004 | $294,015 | $117,360 | $184,006 | $12,453 | $11,008 | | Average sales price | $2.18/Mcf | $2.52/Mcf | $18.23/Bbls | $24.41/Bbls | $62.40/Bbls | $67.61/Bbls | | Net production volumes attributable to Royalty paid | 92,723 Mcf | 116,475 Mcf | 6,436 Bbls | 7,539 Bbls | 200 Bbls | 163 Bbls | Three Months Ended June 30, 2025 and 2024 This section provides a detailed financial and operational review for the three months ended June 30, 2025, compared to the same period in 2024. It highlights a significant decrease in royalty income primarily due to lower commodity prices and increased operating/capital expenses, particularly from Hilcorp's San Juan Basin—New Mexico Properties. The Hugoton and San Juan Basin—Colorado properties generated no royalty income due to expenses exceeding revenues and prior period adjustments Financial Review | Metric | Q2 2025 | Q2 2024 | Change (%) | | :------------------------------------------------- | :------- | :------- | :--------- | | Royalty income | $220,855 | $305,372 | -27.68% | | Interest income | $20,446 | $24,417 | -16.26% | | General and administrative expense | $(45,484) | $(59,138) | -23.09% | | Distributable income | $195,817 | $223,651 | -12.45% | | Distributable income per unit | $0.1051 | $0.1200 | -12.42% | - The decrease in royalty income was primarily due to lower pricing for natural gas liquids and oil/condensate, decreased natural gas production, and increased operating/capital expenses for Hilcorp, partially offset by higher natural gas pricing and increased production for natural gas liquids and oil/condensate[67] - The Trustee allocated $10,462 of its fees to offset interest due to the Trust, as the required 6.00% annualized return on cash was unavailable in the market[70] - The Contingent Reserve balance increased to $1,910,899 as of June 30, 2025, from $1,823,165 as of June 30, 2024, with an intention to increase it to $2.0 million[73] Distributable Income Available for Distribution Per Unit (Q2) | Month | 2025 | 2024 | | :---- | :----- | :----- | | April | $0.0250 | $0.0192 | | May | $0.0318 | $0.0545 | | June | $0.0378 | $0.0388 | | Total | $0.0946 | $0.1125 | Operational Review - Global economic conditions, trade policies, OPEC+ plans, and geopolitical risks continue to create volatility in oil and gas markets, impacting commodity prices and potentially reducing Trust distributions[77][78] - Inflationary pressures, high interest rates, and supply chain disruptions are expected to increase Working Interest Owners' expenses and adversely impact royalty income in 2025[78] - Hugoton Royalty Properties generated no royalty income in Q2 2025 or Q2 2024 due to expenses exceeding revenues, with operating costs increasing by 17% YoY[79][80][81] - San Juan Basin—Colorado Properties also generated no royalty income in Q2 2025 or Q2 2024, primarily due to prior period adjustments for joint interest billing amounts by Simcoe, which put the Trust in a deficit position[85] - Royalty income from San Juan Basin—New Mexico Properties decreased by approximately 28% in Q2 2025, driven by lower natural gas liquids and oil/condensate pricing, decreased natural gas production, and increased operating/capital expenses, despite a decrease in operating costs due to severance tax credits[89][90] Six Months Ended June 30, 2025 and 2024 This section provides a detailed financial and operational review for the six months ended June 30, 2025, compared to the same period in 2024. It shows a significant decline in royalty income and distributable income per unit, primarily from Hilcorp's San Juan Basin—New Mexico Properties, due to lower commodity prices and production. Hugoton and San Juan Basin—Colorado properties continued to generate no royalty income, with the latter remaining in a deficit position Financial Review | Metric | H1 2025 | H1 2024 | Change (%) | | :------------------------------------------------- | :------- | :------- | :--------- | | Royalty income | $331,817 | $489,029 | -32.15% | | Other income | $(432) | $(14,664) | -97.05% | | Interest income | $40,607 | $48,645 | -16.53% | | General and administrative expense | $(95,177) | $(105,330) | -9.64% | | Distributable income | $276,815 | $345,680 | -19.92% | | Distributable income per unit | $0.1485 | $0.1855 | -19.95% | - The decrease in Royalty income was primarily due to lower pricing for natural gas, natural gas liquids, and oil/condensate, decreased production for natural gas and natural gas liquids, and increased operating expense for oil/condensate from Hilcorp[97] - The Trustee allocated $20,924 of its fees to offset interest due to the Trust for the six months ended June 30, 2025, due to the unavailability of the required interest rate[100] - The Contingent Reserve balance increased to $1,910,899 as of June 30, 2025, from $1,823,165 as of June 30, 2024, with an intention to increase it to $2.0 million[102] - Distributable income available for distribution per unit decreased by approximately 26.7% from $0.1742 in H1 2024 to $0.1277 in H1 2025[104] Operational Review - Hugoton Royalty Properties generated no royalty income in H1 2025 or H1 2024, as actual expenses exceeded actual revenues, with operating costs remaining stable YoY[105][106][107] - San Juan Basin—Colorado Properties generated no royalty income in H1 2025 or H1 2024, primarily due to the Trust remaining in a deficit position with Simcoe from prior period joint interest billing true-ups[109] - Royalty income from San Juan Basin—New Mexico Properties decreased by approximately 32% in H1 2025, mainly due to lower commodity pricing and decreased production, despite a 7% decrease in operating costs due to severance tax credits[113][114] - Capital expenditures for San Juan Basin—New Mexico Properties decreased by approximately 27% in H1 2025[114] Liquidity and Capital Resources The Trust's liquidity is primarily derived from royalty income and interest on cash reserves. The Trustee maintains a Contingent Reserve, which it plans to increase to $2.0 million, potentially reducing future distributions to unitholders. Substantial accumulated excess production costs have already decreased Trust income and distributions, and there's no assurance of adequate future royalty income to fund the reserve or provide sufficient liquidity - The Trustee intends to increase the Contingent Reserve to a total of $2.0 million, which will reduce Net Proceeds available to the Trust and distributions to unitholders[117] - Substantial accumulated excess production costs have decreased Trust income and distributions, and in some months resulted in no Trust distributions[118] - There is no assurance that the Trust will receive additional royalty income adequate to fund the Contingent Reserve and to provide sufficient liquidity[118] - Unitholders may not receive material distributions if future royalty income is less than the amount required to fund the increase in the Contingent Reserve[119] Item 3. Quantitative and Qualitative Disclosures About Market Risk Market Risk Disclosures This section states that quantitative and qualitative disclosures about market risk are not applicable to Mesa Royalty Trust - Quantitative and Qualitative Disclosures About Market Risk are not applicable to Mesa Royalty Trust[121] Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures The Trustee's officer responsible for administration evaluated the Trust's disclosure controls and procedures, concluding they were effective with respect to the Trustee and its employees. However, the Trustee relies on information from Working Interest Owners and has not separately evaluated their disclosure controls, noting an ongoing review of certain information and calculations provided by them - The Trust's disclosure controls and procedures were evaluated and deemed effective with respect to the Trustee and its employees as of June 30, 2025[123][124] - The Trustee relies on information provided by Working Interest Owners (e.g., litigation status, operating data, reserve information) and has not conducted a separate evaluation of their disclosure controls and procedures[125][126] - No material changes in internal control over financial reporting were identified during the last fiscal quarter[127] PART II—OTHER INFORMATION Item 1. Legal Proceedings There are no pending legal proceedings where Mesa Royalty Trust is a named party. However, Working Interest Owners have informed the Trustee that the Trust may be subject to ordinary course litigation related to the Royalty Properties, which could materially impact future royalty income if adjudicated or settled for a significant amount - The Trust is not a named party in any pending legal proceedings[130] - Working Interest Owners have advised that the Trust may be subject to ordinary course litigation concerning Royalty Properties, which could materially impact future royalty income if significant charges are made[130] Item 1A. Risk Factors This section refers to the comprehensive discussion of potential risks and uncertainties in the Trust's Annual Report on Form 10-K for the year ended December 31, 2024, and states that there was no material change in these risk factors during the quarter ended June 30, 2025 - No material change in risk factors occurred during the quarter ended June 30, 2025[131] - For a discussion of potential risks and uncertainties, refer to the 'Risk Factors' section in the Trust's Annual Report on Form 10-K for the year ended December 31, 2024[131] Item 5. Other Information During the three months ended June 30, 2025, no officer or employee of the